The last 24 hours have been a game of two halves, yesterday we started with risk aversion following the North Korean missile launch over Japan, gold had rallied to fresh three month highs, JPY was also finding itself in demand with USD JPY down over 1% from the weeks open, while stocks were all trading in the red with European bourses trading at six month lows as traders stayed away from riskier assets as tensions were high awaiting the global reaction. These tensions have since moderated and through yesterday evening and overnight we saw a recovery with gold dropping 1.5% from highs, USDJPY rallying 1.75%, while overnight stocks in Asia saw a strong recovery with that theme continuing this morning in European indices, while US futures are also pointing higher with the S&P up over 1.3% from yesterday’s lows. The markets ability to totally shrug off bad news and press higher is concerning at times, although initial reactions are often based on the worst case scenario and thus when a recovery is expected, we regularly see markets then press higher where they sit now. We should really consider what the drivers are. Are we currently in a better position than we were Monday? If we were to only take our guidance from markets then they would suggest so, but it certainly doesn’t feel like it and in reality the geopolitical scene across the globe remains fragile.
EURUSD rallied above 1.2000 yesterday to highs of 1.2070 although the single currency has since fallen back over 1% from those high levels. EURGBP was a similar story pressing above .9300 before Euro selling finally drove the pair back lower and below .9250. Once again we ask ourselves what the key driver here is, granted USD and GBP have their own weaknesses but the market is banking on the ECB scaling back their QE program in September. What happens if they chose not to, will the Euro give back the 10% gains it’s made in the last three months? We’ve heard nothing from the ECB to suggest they will not begin to taper and that is also part of the reason the single currency continues to find itself supported, however the 10% increase in the Euro will have an impact and Eurozone growth and inflation and it will be interesting to see the reaction to this rise in value in the data in the coming months. It may be a bit too soon to see the full impact just yet but we’ll get some guide from German CPI inflation due for release today, with a print of 1.8%. This will set the tone for tomorrow’s Eurozone release which is due to show price growth of 1.4%, still a long way from the ECB target of 2%. Consumer confidence also crosses the wires so Euro pairs will be watched through the morning.
EURUSD now has a short term top set at 1.2070, initial support at 1.1.1918/25 area is targeted, with 1.1795 below that the next big level to hold.
EURGBP likewise sets yesterday’s highs as resistance at .9307, while support at .9231 offers first area for a bounce on the way down, with trend line support below that around .9205/9210 area.
Towards the US session we’ll be looking at more big data releases and the USD still finds itself vulnerable despite a rally of over 1% from yesterday lows. Markets have totally ruled out the chance of a rate hike this year, in fact markets now looking more towards H2 2018 before the Fed act again to raise rates so any indication data weakening will weigh further on the greenback. A revised set of GDP print for Q2 is expected to show growth improve to 2.7%, up .1% form the initial estimate while the ADP employment report will also look to set the tone for Friday’s NFP report, the private payroll report expected to show 185k jobs added to the economy through August. We also have consumption data due for release due to rise to .3%. Given the markets expectations for rate hikes are now well behind the Feds dot plot, any firmer data should see a rally in USD.